The home flipping business looms large in the minds of Americans. From reality TV shows about the business to infomercials promoting it as a get-rich-quick scheme, the concept of buying a property, renovating it, and quickly flipping it at a profit is known to just about everyone.
Like many businesses affected by the pandemic, home resales have slowed this year, accounting for 4.9% of all national home sales in the second quarter of 2021, down from 6.8% during the same period last year, according to real estate data tracking firm Atom. Still, the average price of a home resold in the second quarter reached a record high of $267,000 nationwide.
Real estate flipping is popular and profitable in the Philadelphia area, mainly because flippers can purchase rundown or distressed properties at a discount and sell them at a higher price. While flippers' profit margins nationwide fell to 33.5% in the second quarter, Philadelphia's return on investment (100%) ranked among the highest of any metropolitan area.
Flipping a home offers good prospects for sellers, but what about buyers?
“There's nothing wrong with buying a used home,” says Chris Egner, president of the National Association of the Remodeling Industry. “You can buy an older home and hire someone to remodel it, or you can buy a home that's already been remodeled and is ready to move in. The thing to be careful of is that, like any business, there are times when you're working with unqualified people.”
So how do you tell if that beautiful home with fresh paint and granite countertops is a bargain or a bad one? Here are some strategies for home buyers.
How to identify a flip
“Remodeled properties generally have a lot of vacancies,” says Bruce Barker, a North Carolina home inspector and president of the American Association of Home Inspectors. “At the very least, they've had the interior repainted. They've probably got new carpeting, granite or quartz countertops, new sinks in the kitchen.” [but with] “An old cabinet. That's pretty much conclusive evidence.”
Of course, not all vacant homes are being resold. Another way to check is to check local government records or real estate websites like Zillow or Redfin to see when the home last sold. If the home sold within the last six months, it's likely been resold.
» READ MORE: Want to make money as a home flipper? Come to Philadelphia, data shows
Egner, a New Berlin, Wisconsin-based home remodeler, also warns consumers to be wary of shoddy or cut-corner work. When a remodel isn't done professionally, it's often things consumers don't see, like plumbing and wiring, that cause problems.
If a home appears to have undergone renovations before it went on the market, potential buyers should always look for work permits, which can also be obtained through local government. If a remodeled home does not have a permit, it could indicate that the work was a DIY project. More importantly, it also likely means that the work was not inspected by a professional.
Do your homework
“Many of the homes that are resold are licensed and priced at fair market value, making them great bargains for buyers,” says Len Cervera, a Duluth, Minn.-based Realtor with the National Association of Realtors. “But in today's market, inventory is scarce and buyers know what they're getting for their money.”
Salvera recommends comparing your selling price to the home's previous sales price, which is usually on public record, especially if it last sold within the last few months. Does any work done since that date justify the increased price?
“If the selling price is going to double, there must be a good justification for it based on the materials and features used in the home,” Salvera said.
Oftentimes, buyers can find old photos online of the home they are considering from when it was sold prior to resale.
» READ MORE: This great-grandmother invests in Philadelphia real estate to build generational wealth for her family
“Ask your buyer's agent if they have experience with resold homes,” Salvera says, “and ask about it early in the process.”
One of the biggest benefits of buying a renovated home is that it's often ready to move in and doesn't require any major work right away. The downside is when that promise turns out to be a lie — for example, if a buyer moves in and then realizes the roof needs replacing.
“Most people don't have time to buy a house, move in, and then spend six months renovating the kitchen, bathrooms, etc.,” Egner says. “If you can buy a property that's move-in ready, that's great. … What better way to reuse and recycle than to turn an old, rundown house into a brand new, functional, usable property?”
Get tested
Once you've gotten serious about a home and decided to buy, one of the most important steps remaining is to get a professional home inspection.
This process can be expensive, but an inspection can ultimately save you money by uncovering problems up front and having the seller cover the cost of repairs. If enough problems are found, an inspection can even dissuade a prospective buyer from making a purchase.
“I inspected a home last week that had new paint on the inside, new carpeting and new countertops in the kitchen, but the bathroom hadn't been replaced,” Barker said recently. “The water heater was old, the HVAC was old and the roof covering was nearing the end of its useful life. This is the kind of thing some real estate agents do. They do superficial things to make it look good, but when you start digging into the details, you start finding things that are problematic.”
» Read more: Home inspections become a bargaining chip in Philadelphia area's booming real estate market
You should apply the same level of due diligence when searching for someone to inspect your home.
“When looking for an inspector, you definitely want to look at things like years of experience, certifications, and licensure if you're in a jurisdiction that licenses inspectors,” Barker says. “Years of experience is the only objective criterion. If you've done enough inspections, you've seen most of what you'll see.”
Ideally, the inspection is a simple process that finds only minor issues, but in any case, it's better to know for sure than to find out after the fact.
“Essentially, what you're buying with a home inspection is peace of mind,” Barker said.
Talk to a mortgage company
A resold home can pose a problem when trying to get a mortgage: For buyers who have a government-backed loan through the Federal Housing Administration or Department of Veterans Affairs, the home cannot be sold again if it has been less than 90 days since the previous sale.
“If you're selling in a very short time frame, FHA isn't an option,” says Emanuel Santa Donato, vice president of capital markets at Better Mortgage of Connecticut. “If the sale price doubles, that period extends to 180 days.”
Atom revealed that the number of FHA-insured loans on 79,733 U.S. homes resold in the second quarter of this year was the lowest since 2007.
» READ MORE: Loan concessions are locking some FHA-backed buyers out of Philadelphia area's booming housing market
For conventional loans, there are no set rules because each lender has its own criteria for granting loans, and Santa Donato said most, but not all, banks have a 90-day limit.
Substandard quality renovations could also affect a buyer's ability to secure a mortgage.
“If the kitchen is unfinished, we can't lend against that home,” Santa Donato says. “If the wiring is exposed, we can't lend against that home. There are pretty clear standards for health and safety that come out of the appraisal process. If there's something that's obviously missing, we can't lend.”
Staff writer Cynthia Henry contributed to this article.